CPO lifted by world stock market rallies

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Last Friday, crude palm oil (CPO) June contract closed at RM2,165 per tonne on the Bursa Malaysia Derivatives Exchange, rising 5.6% from a week ago. It was buoyed by bullish US soyabean planting data and stock market rallies around the world. The contract reached a six-month high of RM2,185 in intra-day trade last Friday.

The Kuala Lumpur Plantation Index meanwhile rose 2% week on week.

The US Department of Agriculture (USDA) released its prospective plantings report last Wednesday, revealing higher-than-expected soyabean planting acreage. The department’s planting survey found that farmers plan to plant 76 million acres of soyabean, up slightly from last year but lower than the market’s expectation of 79.3 million acres. If the 76 million acres are fully realised, that would be the largest on record, says the USDA.

Meanwhile, farmers plan to plant 85 million acres of corn — which is 1% down from last year but within market expectations — due to lower corn prices and unstable input costs. Analysts say tightening supplies and lower input costs compared to corn are encouraging farmers to plant soyabean this year.

Overall, says the USDA, farmers may idle millions of acres of land as the total area planted with principal crops has declined by 7.8 million acres or 2.4% from last year. Farmers facing difficulty in getting credit are cutting back costs by switching to cheaper crops or leaving their land idle.

The soyabean acreage number is bullish for crude palm oil as less soyabean means that any shortfall can be filled by CPO. CPO also gained on the stock market rallies around the world as investors take a cue from improving economic data indicating that the worst may be over. The change in sentiment also led to crude oil prices rising while the greenback experienced some weakness against major trading currencies. The US Dollar Index, a measure of the currency’s movement against six major currencies, declined 1.9% last week.

“CPO prices are getting a lift from improving economic sentiment, with people calling for a bottom. There’s been a change in perception where those who saw the glass as half empty are now seeing it as half full,” says analyst Carey Wong of OCBC Investment Research Pte Ltd in Singapore.

He points out that on the physical side, there will still be downward pressure on CPO prices in 2H2009 when fruit and oil production is expected to increase. In Indonesia, oil production is expected to rise by 7% to 8% this year due to the palms reaching maturity and new crushing capacity coming onstream. Furthermore, fresh fruit bunch yields are expected to improve this year after a decline last year as the palms recover from stress caused by dry weather in 2006.

The USDA report is another bullish factor. But while the farmers’ planting plans are an indication of sorts, says Wong, there is still some way to go before the actual harvesting of crops and various things, such as the weather, come into play between now and then.

“There’s a long gestation period; it is not something that will happen overnight,” he says.The prospective planting report is the first official survey of US farmers’ planting plans for 2009. Some 86,000 farm operators across the US were surveyed in the first two weeks of March. The next survey will be held in June.

On the bearish side of the divide, analysts remain concerned about lower CPO demand and higher supplies when production picks up in 2H2009, although the bullishness is expected to be sustained over the next couple of months, given the lack of negative catalysts.

The market is expecting lower CPO inventories in the Malaysian Palm Oil Board’s palm oil statistics to be released this week. Meanwhile, CPO exports are said to have risen 5.4% in March, month on month, according to cargo surveyor Societe Generale de Surveillance, although another surveyor, Intertek, reported a decline of 0.5%.

Chart-wise, futures dealer Donny Khor of OSK Investment Bank Bhd reckons that the CPO market is still supportive, especially after passing the RM2,000 level. The third month contract’s resistance is at RM2,250 per tonne while its support is at RM2,020 to RM2,050. Looking at the fundamentals of the commodity, supplies remain tight while production has not been growing fast enough. Khor believes prices above RM2,000 will be well supported until the end of the month.

“Beyond April, it depends on how fast production grows and the demand numbers,” he adds.Has the link between CPO and crude oil been strengthened in recent weeks with Brent crude and Nymex rising about 11.9% and 15.1% respectively from a month ago? Khor says the link is now much weaker although higher crude oil has helped support soyabean oil and that, in turn, has kept CPO prices buoyant.

“There’s still a bit of correlation but it is not as clear as it used to be. The speculative lead is still there, where traders see it as a factor to trade,” he says.

This article appeared in The Edge Malaysia, Issue 749, April 6-12, 2009.